Typologies of Economic Theory and the Two Canons

We have recently argued that when focusing on very long-term longitudinal trends in economics, two ideal types of economic theory appear to have co-existed parallel over an extended period of time. These ideal types can be seen as constituting two separate filiations – to use Schumpeter's term – and they come into occasional methodological clashes. Werner Sombart fittingly calls the first tradition activistic-idealistic, a tradition born with the Renaissance. The second type of economic theory he calls passivistic-materialistic, a tradition having its origins with Mandeville and Adam Smith and solidifying as the ‘a-priori method’ with David Ricardo. The purpose of this paper is to outline the characteristics of the two traditions – the tradition behind today's mainstream and ‘The Other Canon’ – and to discuss the position of Austrian economics in this context.

In most sciences, periodical and radical gestalt-switches terminate old theoretical trajectories and initiate new ones. In a Kuhnian paradigm shift the scientific world moves from a situation when everybody knows that the world is flat, to a new understanding when everybody knows that the world is round. This happens in a relatively short time. Lakatos’ idea of ‘degenerating scientific research programmes’ that gradually shift to ‘progressive’ ones convey a similar idea. In this respect economics is different. In economics the theory that the world is flat has been living together with the theory that the world is round for centuries. We describe this apparent lack of paradigm shifts in economics by the co-existence of these two long-term parallel filiations, where weight and influence periodically tilt back and forth between two alternative Weltanschauungen.

Today evolutionary economics – based on a tradition founded by the Austrian Joseph Alois Schumpeter – represent the most important challenge to the mainstream. However, evolutionary economics has, in our view, so far had an unnecessarily limited scope. This tradition now focuses relatively narrowly on innovations, including neither Schumpeter's own interest in financial matters, nor addressing to any extent the broader issues of uneven economic growth and employment on a world level which are, at their origin, intimately tied to Schumpeterian mechanisms. And, by bringing simple ‘Schumpeterian’ variables into mainstream equilibrium models, his message is being domesticated and made innocuous. As in the case of Keynes, the mainstream again shows a great ability to usurp, absorb, and subdue threatening alternative theories.